A rescue package for Greece could involve a short-term default without disastrous repercussions for the euro zone, Austria's central bank governor said, the first sign of a crack in the European Central Bank's hard line.
The ECB has proved a major stumbling block to agreeing a second bailout for Greece, saying it would refuse to accept Greek bonds as collateral in its lending operations in the event of a default or a selective default.
Ewald Nowotny, head of Austria's national central bank, said a full default would have grave consequences for Greece and the ECB's ability to accept its debt as collateral. But he indicated that selective default might work.
There is ... a full range of options and definitions -- from a clear-cut default to selective default, to a credit event and so on, he told CNBC in an interview broadcast on Tuesday.
This indeed has to be studied in a very serious way. There are some proposals that deal with a very short-lived selective default situation that would not really have major negative consequences, he said.
Nowotny's remarks differ starkly from the stance taken by ECB President Jean-Claude Trichet, who told a news conference after the ECB's monetary policy meeting earlier this month: We say no to selective default, no to a credit event.
Trichet repeated that view in a newspaper interview published on Tuesday.
Euro zone leaders hold an emergency summit on Thursday, and any sign the ECB could be open to a compromise on the collateral it accepts at its funding operations would increase the chances of a deal for Greece.
BEGINNING OF THE END?
Highlighting the seriousness of the situation, former ECB chief economist Otmar Issing told Germany's Frankfurter Allgemeine Zeitung daily that a massive haircut is unavoidable for Greece.
Issing, who remains an influential figure in euro zone policy circles, added, however: If Greece were to stay in the currency union after that and can count on further help and refinancing from the ECB, that will be the beginning of the end of the currency union.
The ECB requires that banks put up adequate collateral to receive funds at its regular refinancing operations, upon which Greek banks are utterly reliant for liquidity.
The ECB's insistence that it would not accept collateral that is in default is aimed at making sure euro zone governments -- with or without the private sector -- assume the cost of dealing with the crisis, rather than pushing it over to the ECB, which fears its independence being compromised.
In the high-stakes standoff over the Greek crisis, the collateral card is the closest the ECB has to an ace: refusing to accept Greek sovereign bonds as collateral would deprive Greek banks of the funds on which they rely, crippling the Greek economy and risking contagion to other euro zone economies.
Ratings agencies have said that proposals to roll over Greek bonds into longer maturities would be a default and banking and government officials have struggled to find an alternative.
Nowotny stressed it was ultimately up to the ECB -- not ratings agencies -- to decide what it could accept as collateral.
At the end of the day, it has to be the decision of the ECB, he said. The ECB should not be totally dependent on rating agencies. It is at the end of the day our own responsibility, our own decision.
We have proved this in the case of ... Greece and of Portugal with regard to what kind of collateral we accept, so there is a certain case for independence but of course ... with regard to our own statute, there are limitations and these have to be observed.
Earlier this month, the central bank said it would suspend its credit rating requirements for Portuguese government bonds used as collateral in its lending operations. (Editing by Mike Peacock/Patrick Graham)